July 10 (Bloomberg) -- Advanced Micro Devices Inc., the
second-biggest maker of processors for personal computers, fell
the most in almost 10 months after reporting an unexpected drop
in second-quarter sales, citing weakness in China and Europe.

Sales fell 11 percent in the period that ended in June from
the prior quarter, indicating revenue of $1.41 billion, compared
with an average analyst estimate of $1.63 billion, according to
a Bloomberg survey. AMD had previously forecast sales would rise
3 percent, plus or minus 3 percent.

Demand for AMD’s products is being hurt by slower growth in
China, the second-largest economy, and a worsening economic
climate in Europe. The chipmaker is also suffering as consumers
shun PCs in favor of tablets, which rely on semiconductors made
by other companies. AMD’s sales drop may be a harbinger of
disappointing results at peers, such as Intel Corp., said Stacy
Rasgon, an analyst at Sanford C. Bernstein & Co.

“I had been hoping that the new product launches would
help them overcome the macro environment, but it doesn’t look
like that happened,” said Rasgon, who is based in New York.
“This is not good. I wonder what this means for Intel.”

The shares dropped 11 percent to $4.99 at the close in New
York, the biggest decline since Sept. 29. AMD has fallen 7.6
percent so far this year.

Margin Intact

AMD, whose sales beat analysts’ predictions in the first
quarter, projected higher sales in April, citing growing demand
for personal computers. This quarter, gross margin, or the
percentage of sales remaining after deducting the cost of
production, will meet its previous predictions, AMD said.

Chief Financial Officer Thomas Seifert said in April that
gross margin would be “flat to slightly up in the second
quarter,” from the first. Gross margin, not including certain
costs, was 46 percent in the first quarter.

AMD may have lost market share to Intel by refusing to cut
prices in order to maintain profitability, according to a
research note by Doug Freedman, and analyst at RBC Capital
Markets in San Francisco.

The drop in revenue may signal that AMD is grappling with a
backlog of unsold chips, said Patrick Wang, a New York-based
analyst for Evercore Partners Inc.

“It’s a huge miss for any company at any scale,” said
Wang, who is based in New York. “When you miss by this
magnitude you end up with a ton of inventory in the pipeline.”